Councils in Orkney, the Isle of Wight, and the City of London have some of the best-performing pension funds in the country, while the funds for local-authority workers in Bedfordshire, Clwyd and the London Borough of Barking and Dagenham are among the worst.

Gareth Waterson (Ken Amer, Orkney Photographic)

Across the UK, local-government workers' funds are run by 101 separate authorities. According to a survey of 81 of these authorities compiled by WM Company, a division of State Street; supplemented by Financial News research into the other 20, the best-performing fund during the 12-month period to March 31 2013 was the Orkney Islands Council Pension Fund.

With a return of 17.9% for the financial year, the £223 million Orkney fund beat much bigger funds with much bigger management teams.

Gareth Waterson, head of finance at Orkney Council, said the fund’s returns were down to sticking with a relatively simple investment strategy. The fund has just one asset manager – Edinburgh-based Baillie Gifford – and invests about 75% in global equities, and 25% in a “diversified growth” fund.

He added: “Most larger pension funds diversify across a number of managers – we are benefiting from the fact that we are possibly slightly more risky in having only one manager, but one that is performing exceptionally well.”

The Orkney fund has outperformed its internal targets over longer periods as well. Waterson said that as of the end of December, the fund had made a 20.9% return against 15% for its benchmark over 12 months, 10.1% against 7.6% for three years, and over the past five years, the fund is up 14.5% against 11.1%.

Waterson also said the fund had benefited from diversifying its investment strategy in 2011, giving Baillie Gifford a broader remit to invest in global stocks rather than primarily in the UK, and allocating to the Diversified Growth Fund.

Other top-performing funds in the WM rankings included the Isle of Wight Council pension fund, the London Borough of Bromley’s pension fund, Dorset County Council Superannuation Fund and the City of London Corporation’s Pension Fund, all of which made over 16.7% on their money during the period.

Related

Two of the funds at the other end of the table are special cases. The £12.6 billion Greater Manchester Pension Fund is split into two – a main scheme, with £12.3 billion under management and a £330 million “Designated Fund” which is earmarked for local employers whose workforces are largely retired. As a result, it invests exclusively in cash and UK government bonds, leading to its return for the year of 4.2%.

The Greater Manchester Pension Fund's main fund reported returns of 14.5% during the period, ahead of the weighted-average return in WM Company's survey of 13.8%, and placing it in the top third of the rankings.

The Environment Agency’s £120 million Closed Pension Fund is also a special case. A legacy scheme for former employees of the UK's regional Water Authorities, abolished upon water-industry privatisation in 1989, it invests solely in long-dated gilts and is supported by grant-in-aid payments from central government.

According to its annual report, its portfolio returned 10.8% during the 12 months to March 31 2013, but WM Company’s figures reported its return as 10.5%. The Environment Agency's Active Fund, its principal scheme, returned 14.2% during the financial year, again ahead of the local-authority average.

Neither the Environment Agency, nor the Greater Manchester Pension Fund, were available for comment late last week.

The bottom performer among the mainstream council funds was the London Borough of Barking and Dagenham’s pension fund, which returned 9.6% on its money during the 12-month period – behind its own target of 10.8%. A spokesman for the council said this was due to a variety of factors, including underperformance by its fund managers and the transition of money between investments during the period.

The spokesman said the £636 million pension fund had “one particularly poor-performing equities manager and one poor-performing property manager” during the period, “neither of whom hold those mandates with the fund now”.

The spokesman didn't disclose the names of the firms he was referring to. But according to Barking and Dagenham's pension-fund report for 2012/3, "an actual negative return came from the Fund’s property manager, RREEF, with underperformance relative to benchmarks from [equity manager] AllianceBernstein."

An AllianceBernstein said it was the firm's policy not to comment upon potential client matters. A spokesman for RREEF, a unit of Deutsche Bank, declined to comment.

The Barking and Dagenham council spokesman said: “The fund has undergone substantial change in the last 18-24 months and this period captures the end of that previous asset allocation and set of fund managers. The performance in that period was disappointing and that is a major factor in why such substantial change was made.”

The remaining two funds in the bottom five, the Bedfordshire Pension Fund and the Clwyd Pension Fund, both have less money allocated to equities than is usual for local-government schemes, with the aim of controlling investment risk. This is reflected in lower internal targets – Bedfordshire had a target for 2012/3 of 9.6% while Clwyd’s was 9.2%, and both outperformed these benchmarks.

According to Clwyd’s annual report for last year: “We have a more diversified investment strategy than most LPGS funds with fewer of our assets allocated to equity risk … ideally we would have increased our allocation to equities during the year but, at the time, there did not seem to be a fundamental case to take action. As stated by our Independent Adviser/Consultant in his annual report, ‘as always, hindsight is a wonderful thing’.”

A spokesman for Bedfordshire County Council did not respond to a request for comment on Friday. A spokeswoman for Flintshire County Council, which administers the Clwyd fund, said the annual report "fully explained the reasons for the comparative performance."

UPDATE: This story was updated on Monday February 3 at 12.00 noon with new information on the 20 council pension funds not covered by WM Company's survey, on the performance of the Greater Manchester and Environment Agency's main funds, and on the performance of AllianceBernstein and RREEF at the Barking and Dagenham Pension Fund.